Amid a tough office market, CRE professionals are finding some opportunities. Demand remains strong for small offices with big amenities, such as Redwood Exchange. Photo courtesy of Byrnes and Associates.
A quick scan of headlines presents a bleak outlook.
Lenders and owners have initiated distress sales or auctions of 100 Charles Center, the Can Company and other celebrated commercial properties in the heart of Baltimore. Sale prices for some central business district office buildings have plunged to $50 a square foot — a fraction of their previous value. And impending or possible departures of other tenants from downtown offices raise the prospect of a deeper vacancy problem.
No one is denying that the office market in the Baltimore area is facing profound challenges that won’t be resolved quickly.
However, amid those tough realities, CRE professionals see bright spots: submarkets that are thriving, building conversions or repositioning that are filling properties, willingness of lenders to provide forbearance, and opportunities for investors and developers with deep local knowledge and vision to seize rare opportunities. There’s just one common element between the bleak and bright aspects of the current office market: Navigating any aspect of this market is hard.
Recent sales of downtown office buildings present sobering insights into a market reset.
7 St. Paul Street, a 24-story, 508,714-square-foot tower that was 65 percent leased to prominent companies and state agencies, sold this spring for $60.92 per square foot — about two-thirds of what it sold for five years earlier.
1 East Pratt Street, a 10-story building at Pratt and Light, sold in a foreclosure auction for $25 million — $55 million less than it sold for in 2018.
1 South Street, a 30-story office tower, sold for $50 a square foot, $24 million in total and $31 million below its 2015 sales price.
“100 North Charles Street, the Angelos Building, sold, I believe, for approximately $13 a foot which is still less than what Peter Angelos paid for it 25 years ago,” said Owen Rouse, Senior Vice President of MacKenzie Commercial Real Estate Services.
Low sales prices for downtown office buildings is creating some opportunities for repositioning. The sales team for 20 South Charles believes the building may find new life as a mixed-use property or a business incubator. Photo courtesy of Trout Daniel and Associates.
The national shakeup in the office sector, high vacancy rates downtown and uncertainties about future office demand have changed the way central business district buildings are valued.
“Typical cash flow projections are difficult to pro forma because we can’t accurately forecast the demand,” said Don Schline, Senior Vice President, Investment Sales at KLNB. “So, we are back to per-square-foot pricing for a lot of CBD office assets because we don’t think projected cash flow or cap rate analyses are going to be well received.”
Downtown’s low and uncertain occupancy rate is about to get even worse.
“T. Rowe Price is leaving 100 E Pratt Street in November for their new headquarters in Harbor Point,” Rouse said. “That will leave a new 400,000-square-foot, plus or minus, hole on Pratt Street.”
Rouse created a “market snapshot” of the office properties on Pratt and Lombard streets from Eutaw to President streets.
“Within all the big buildings in that corridor, you have 3.6 million square feet of office space,” he said. “Vacancies, once T. Rowe leaves, will total 1.7 million square feet — 48 percent. There is little to no organic growth to backfill it and state leases won’t fill it.”
The redevelopment of Harborplace will likely inject new life into the CBD market, but not until it delivers in 2030, Rouse said.
While downtown office valuation problems won’t get reversed anytime soon, some analysts predict they won’t get worse either.
“From a macro economic perspective in transaction volume and pricing, we have seen a bottom in both of those metrics and we are now bouncing along the bottom,” Schline said. “We have to work through the bottom of the cycle… We do have a fairly large wave of loan maturities coming this year and next year which you would anticipate would flood the market with distressed sales. But we are seeing lenders extend mortgages and provide forbearance and work with borrowers as best they can.”
In the face of current market challenges, however, certain submarkets and office product types are faring well. Rocky market conditions are even creating select opportunities for investors and developers.
With rents as low as $550 per month, office tenants can access 10,000 square feet of lavish amenities at Redwood Exchange. Photo courtesy of Byrnes and Associates.
“Not all office is created equal,” said Kevin Tehan, Principal with Columbia National Real Estate Finance. Local submarkets — such as Towson, Canton, Maple Lawn, Hunt Valley, Columbia, Annapolis and others — “are performing great and occupancies are remaining stable,” Tehan said.
“Smaller floor plate offices with smaller tenants are doing fine,” he added. “The rental rates are holding steady and, in some cases, there’s very limited availability of space. We are following closely where some of these assets in more infill/downtown locations are trading. Some locations are benefiting from either downsizing or relocation or consolidation of offices.”
That demand for small-footprint offices has compelled Byrnes & Associates to invest in city office properties, including its purchase of 225 and 233 East Redwood Street, totaling 90,000 square feet.
“We did the purchase in November 2020. The buildings were five percent occupied with two tenants,” said Brad Byrnes, President. “Our attorney at the time asked us if we needed to speak with a therapist to see if we were truly aware of what we were about to do.”
Byrnes, however, saw the purchase as an opportunity to acquire exceptional historic properties and repurpose the space, which previously was the law offices of Gordon Feinblatt, to serve a very different type of tenant. “The strongest part of the office market has been for spaces 5,000 square feet or smaller,” he said.
So, the company created small tenant spaces, including single offices with rents starting at $550 per month, and provided all tenants of Redwood Exchange with access to 10,000 square feet of amenity space, including conference rooms, a rooftop deck and penthouse lounge.
“I won’t say it was easy to lease up the space,” Byrnes said. “But right now, we have over 70 leases, we are over 90 percent leased and we have had only five percent turnover.”
Byrnes, who is currently preparing to close on the purchase of another downtown office building, sees the current market as “the greatest opportunity in my lifetime to invest. We are being methodical but also methodically aggressive and making sure we find the right deals for ourselves and for investors that we represent through our third-party brokerage.”
The shifting office market enabled the buyer of 4201 Mitchelville Road, Bowie to acquire a desirable building at a percentage of its replacement costs. Photo courtesy of MacKenzie Real Estate Services.
And Byrnes is not alone in finding good deals in the current market.
In June, MacKenzie brokered the sale of 4201 Mitchellville Road in Bowie. The five-story, 50,000-square-foot building sold for $6.15 million.
The buyer, who intends to use part of the building for their company headquarters and lease the rest, “got this property at a fraction of its replacement costs,” Rouse said. Originally constructed as a bank headquarters, the building “has balconies on all four corners, center-stack design to let light in and really good design elements that have withstood the test of time. It would cost $300 to $350 a square foot to build now. The buyer got it for $127 a foot.”
Other properties hitting the market present the challenge and opportunity to think about commercial real estate differently, said Gilbert Trout, Senior Associate, Investment Sales at Trout Daniel & Associates.
After approaching the owner of the Sun Life Building at 20 S Charles Street, Trout listed the 12-story, 168,000-square-foot property for sale this spring with an asking price of $10 million.
“This is such a neat building. It’s a cool, black obelisk with floor to ceiling windows. It looks like something out of ‘2001, A Space Odyssey,’” Trout said.
Marketing the property, however, is not simply a matter of chasing the best price, Trout said. For the deal and the property to succeed, Trout believes he needs to find a buyer with deep knowledge of the local market and a distinct vision for the property. That might mean transforming 20 S Charles into a mixed-use property with street-level retail, a few floors of offices then several floors of stylish, one- and two-bedroom apartments. It may mean working with an existing tenant, the Downtown Partnership, to reimagine the building as a business incubator. It may mean not selling the building at all and, instead, creating a joint venture between the existing owner and a new investor, he said.
“In the large scale of things, you can buy real estate 40 miles from D.C. in a major port city for under $100 a square foot. That is an outrageous opportunity,” Trout said. “But just because you can buy it at a low rate doesn’t mean you will be successful or even know what to do with it. For properties like this to succeed, Baltimore has to rely on people who really know Baltimore, really know our markets, really know our neighborhoods, and are tenacious about identifying and supporting tenants so that all of our businesses succeed.”